US Geothermal Fizzles

Geothermal power generator US Geothermal (HTM: NYSE) came up short in reporting financial results for the first quarter ending 2017 – at least from the perspective of the four analysts with published sales and earnings expectations for the company. Operating revenue of $8.4 million slipped slightly from the same period a year ago, but produced slightly lower net income of $1.1 million. The company’s share was $260,000 or a penny per share. Not good enough say the analyst’s who were collectively looking for two pennies per share in earnings!

Missing earnings expectations has become a bad habit for US Geothermal, having failed to clear the consensus hurdle three quarters in a row. The previous missed had resulted in modest trimming of expectations. Investors should be prepared for another round of nipping and tucking in revenue, profit margin and earnings predictions. The steady drumbeat of lower numbers, and the muted commentary that comes along with it, is usually a drag on share price.

Investors have to question whether a period of price weakness is a good time to pick up shares of a quality company at bargain prices…or a time to run for the hills. It is May after all, when it is ‘time to sell’.

From a revenue standpoint, US Geothermal benefited from increased output at its Raft River facility after installation of a new production pump at one of the Raft River wells. That installation was completed in late March 2017, suggesting that the real impact will not be observed until report of the June 2017 financial results. Unfortunately, the company also faced a setback in the quarter. The Neal Hot Springs Unit 1 was out of production for five weeks in late January and early February 2017, after vaporizer tubes froze. The company reported a negative impact on power generation valued at $830,000 due to the equipment failure at Neal Hot Springs.

Total generation was 89,613 megawatt hours in the quarter compared to 93,787 megawatt hours in the same quarter last year. With Raft River up 100% during the quarter and San Emidio follow up in second place with 98.6% availability for the quarter, it was really Neal Hot Springs with just 82.5% availability that was the cause of the slippage in power production in the quarter. Fortunately, business interruption insurance will cover about 38% of the lost revenue. Property insurance will provide another $2.0 million to repair and replace the damaged equipment.

Management seemed unfazed by turn of events at Neal Hot Springs, reiterating previous guidance for revenue and earnings in 2017. Revenue is expected in a range of $30 million to $34 million, providing net income in a range of $4 million to $8 million. US Geothermal’s cut of net income would be $1 million to $4 million. Thus it would seem that Neal Hot Springs is fully back to normal and with the increased production at Raft River, management is apparently expecting another decent year. The increased output from Raft River in the first quarter was valued at $200,000 for about one week of power generation. Simple math provides an incremental addition of $1.2 million for a full quarter, more than enough to make up for the shortfall from Neal Hot Springs in the first quarter.

Importantly, management’s guidance is based on existing production facilities. There are expansion projects in the works, but potential power from these projects is not included. Altogether the development pipeline encompasses 115 megawatts of incremental power production capacity.

Progress has been made at the Geysers in California where the company is at the point of sourcing turbine generators and is negotiating a power purchase agreement with a single buyer. The company is targeting end of 2018 for bringing the project on-line.

The company has received permits to deepen three wells in its San Emidio II reservoir in Nevada that could elevate power production at that location from the current 10 megawatts to over 40 megawatts. Drilling will commence this year when spring weather conditions allow.

Additionally, at San Emidio an application for new development of three power plants, twenty wells and a power transmission line has already been submitted to the U.S. Bureau of Land Management. The company has targeted 25 megawatts to 45 megawatts as the ultimate resource size for this latter expansion project.

A geothermal power production project in El Ceibillo in Guatemala is awaiting a request for proposals from the government, to which US Geothermal is planning a competitive bid. The process is expected to unfold yet in 2017.

Successful commissioning of all these projects would more than triple the size of US Geothermal’s power production capacity, which is around 45 megawatts today. It will not be accomplished at the hand of current chief executive officer Dennis Gilles. In late April 2017, the board of directors issued a cryptic press release indicated they would not be extending the employment agreement with Gilles. A search committee will be looking for a successor to take over after Gilles’ current contract expires in July 2017. Gilles may still have an influence over operations through an advisory agreement. If the board could not accept an extension to his employment agreement, what foundation could be built into an advisory role that would be more palatable?

The market has had an opportunity to fully digest the news of Gilles department as CEO. However, slippage in the first quarter production reminds investors of the many moving parts and sources of business risk inherent in geothermal power production. Knowledgeable leadership is a key hedge against those risks. The specter of a shuffle in the boardroom is likely to resurface as a source of worry in the coming weeks. Thus the price weakness that might ensue following a ‘quarter earnings miss’ might be deeper and more protracted than usual because of leadership change.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.